Think before gifting down payment on kids' home

Jim Yih, Edmonton Journal07.30.2012

Although some may appreciate the financial help when it comes to buying a home, other children develop a sense of entitlement and learn that if they want something, their parents are just a phone call away.

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With high real estate prices and tighter mortgage lending rules, it can be tough for first-time homebuyers to get into the market. Many new homebuyers look to parents for help, and many boomers and soon-to-be retirees are quick to help out by offering the down payment. Is this a good strategy?

Many years ago, when Rick and Joan - a couple I met at a seminar I held - were buying their first home, Joan discovered that her late grandfather had set aside money for her long ago and the money was to be used for either education or for the purchase of her first home. Joan appreciated this so much that she wanted to do the same for her kids.

When her son, Jacob, wanted to buy his first home, he had less than $5,000 saved, so Rick and Joan wanted to help by putting an additional $10,000 toward the down payment. After they had given Jacob the money, they found out that he only put $5,000 of the money toward the down payment and used the other $5,000 to buy a new couch and TV. Needless to say, they were a little disappointed. Sometimes the more we give our kids, the less inclined they are to appreciate the value of earning their own way. Although some may appreciate the financial help, others develop a sense of entitlement and learn that if they want something, their parents are just a phone call away. I've seen many situations where young adults ask for handouts for important things like food and then use their own money to buy luxuries like TVs and the latest tech gadgets.

Maybe there are other ways to help our sons and daughters, and teach them financial fundamentals at the same time.

LOAN VS. GIFT

Instead of giving money (even for financially productive uses like a down payment on a home or paying off credit cards), maybe the concept of a loan has more educational value. Rarely do we get things for free. Instead, we have to work for things. If we borrow money from the bank, we have the consequence of making payments. Why should this be any different when it comes from parents instead of a bank?

When it came time for Jacob's younger sister to buy her first home, Rick and Joan were a little more careful. They lent their daughter Jen $15,000 for the down payment. On top of Jen's mortgage payments, they wanted Jen to factor in $150 per month repayment for the $15,000 down payment.

What's interesting is Rick and Joan really viewed the loan as a gift, so they took the $150 payment and put it into a savings account with the intention of surprising her in the future when she might need money to pay for a wedding or help her with RRSPs.

INFORMAL EDUCATION

Formalizing loans to kids can be a great way to enforce financial learning and teach them that every purchase has a financial consequence. If there is no consequence, there may be no financial education, which is a real concern.

If you think about it, there are very few venues for formal financial education. You don't learn it at school. You don't usually get it at work.

Instead, all the financial education is informal learning, so lending money to kids instead of giving it to them may be a great opportunity for teaching and learning about money.

MY FIVE CENTS

As a parent of four young boys, I am a long way from having to deal with down payments of homes, but I am passionate about the responsibility of teaching them that money does not grow on trees. Every dollar we have as a family is earned, and therefore, every dollar spent is spent carefully.

Every family is unique and must do what is right for its shared values and belief systems.

In my experience, I see a lot of parents giving kids money for different things, including down payments on houses. I'm not against this generosity, but I do think parents should think through their options before they give money away, especially if it teaches their children nothing about financial decisions and consequence.

A loan may be a great alternative to gifting money to kids, even if the intention is to give the money away.

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